The importance of getting the details right in SMSFs – Fitzmaurice and Commissioner of Taxation

The AAT has upheld the disqualification of a director of a trustee of an SMSF in Fitzmaurice and Commissioner of Taxation (Taxation) [2019] AATA 2217.

Central to the disqualification were the failure to keep good records, explain transactions adequately, and conduct related party dealings on commercial terms. All could have been avoided with better documentation and attention to detail.

There were several principal sets of breaches.

Money withdrawn from the SMSF for expenses after a house fire destroyed the members’ home

After fire destroyed the members’ home, they (on verbal advice from their accountant) withdrew money from their SMSF to pay for clothes and accommodation. The members also withdrew an amount to buy a car for their daughter so she could get to work. When their insurance claim was paid, the members paid most of the money back.

The director was advised by their accountant they could withdraw money in some circumstances for severe financial hardship. However, the members did not qualify for the appropriate condition of release.The withdrawals were not adequately documented and the members could not fully account for them. In addition, the amount withdrawn was not repaid in full and the members could not explain why.

Real estate leased to the members’ family trust

The SMSF owned real estate that was leased to a family trust controlled by the members.

It was of concern that:

• there was no lease agreement until after the arrangement finished
• rent was not paid for the whole term of the lease
• the SMSF did not try to enforce unpaid rent against the family trust
• money was transferred from the SMSF to the members to fix storm damage on the property, but no evidence could be provided to substantiate the expenses
• the storm damage was to cabins on the land owned by the family trust, so fixing them was a responsibility of the tenant and not the SMSF.

Conclusion

The AAT upheld the director’s disqualification even though the funds of the SMSF were not depleted and there was no dishonesty or intention to defraud in her conduct. The AAT found breaches of section 35B (recording assets at market value), section 62 (sole purpose), section 65 (loans to or financial assistance to members), section 109 (arm’s length terms) and record keeping obligations.

While the SMSF had clearly breached the Superannuation Industry (Supervision) Act 1993, the breaches could have been either avoided altogether or the impact lessened if:

• the SMSF and the family trust had entered into a written lease agreement when the arrangement started
• the family trust had complied with the lease agreement
• the lease agreement had been properly terminated when the family trust ceased using the property
• the family trust had paid rent in accordance with the lease agreement and the SMSF had enforced compliance with it
• the members could establish how the money withdrawn from the SMSF had been used
• the members could adequately explain the transactions
• the SMSF had obtained evidence of the value of the property.

If you have any questions about this case or documenting SMSF actions, please contact a member of our SMSF team.